Tax Avoidance

The tax avoidance issue seems to be firmly entrenched into current public opinion with Starbucks bowing to public pressure and agreeing not to claim a tax deduction for certain amounts paid to its overseas companies. What has received less press coverage is that the long awaited judgement has been published in respect of the Rangers tax case. For those unfamiliar with this case, it concerned the way in which Rangers Football Club decided to pay their employees, primarily well paid professional footballers, many of whom had overseas citizenship. Rangers had received advice from a company that specialised in tax avoidance arrangements who suggested that it established employee benefit trusts (EBTs) as a vehicle to pay its employees.

Typically Rangers would make a large contribution into an EBT on which it claimed a tax deduction. This point was largely irrelevant as Rangers had made large financial losses, ultimately leading to it being placed into receivership and no tax relief was ultimately claimed. The EBTs were established outside the jurisdiction of the UK and the trustees used these contributions to establish sub trusts for different employees. The employees could then make requests to the trustees for access to the funds and this was normally made in the form of a loan.

This is where it gets really interesting from a tax perspective, as if it was not already interesting enough. HMRC argued that this loan should really be treated as earnings of the employee and taxed accordingly, whereas Rangers and their advisors were of the view that the payment was a loan and as interest was paid on it there were no income tax liabilities (although there were beneficial inheritance tax liabilities).

The judgement extends to 145 pages. Compare this judgement to the House of Lords in the landmark EBT case "MacDonald v Dextra Lighting Limited" which was a mere one and half pages long. It reads like a script from the film Reservoir Dogs - in order to preserve anonymity, individuals involved were given pseudonyms such as Mr Turquoise, Mr Red and Mr Blue. Two out of three of the Judges, somewhat surprisingly in the mind of many people, ruled in favour of Rangers. This may initially be seen as a setback for HMRC, as having submitted an appeal to the High Court, they will have to do it all again, although this may not be for 18 months. However, it does provide them with the ability, should they be successful, to have a decision that will have the effect of law. This may ultimately prove to be extremely valuable to HMRC in their pursuit of tax in respect of thousands of similar arrangements.

My personal hope is that it might persuade HMRC to adopt a more conciliatory approach to companies who have entered into such schemes and would like to agree a settlement with HMRC, but are put off because their current inflexible approach provides those companies with little if any commercial incentive to do so.